Christopher Vecchio says BITO ETF is more of a positive sign than a good investment vehicle.
Aside from the unnecessary custodian fees, bitcoin futures markets are in contango.
He says since physical storage of bitcoin isn’t really an issue, futures contracts aren’t necessary.
The ProShares Bitcoin Strategy ETF (BITO) which tracks bitcoin futures instead of the cryptocurrency itself, launched on the New York Stock Exchange last week. The buzzy ETF became the fastest to surpass $1 billion in assets under management, signaling that the digital asset is finding its place on Wall Street.
But Christopher Vecchio, a senior strategist at DailyFX.com who previously traded stocks and currencies, says it’s more buzz than anything.
On Friday, Valkyrie’s Bitcoin Strategy ETF (BTF) also launched, although it was met with less fanfare as bitcoin sold off. While the approvals send a positive signal for digital assets on their path to legitimization, the actual investment vehicles are probably a bad idea, Vecchio said. If you’re looking for exposure to bitcoin, you should just buy bitcoin, he added.
Aside from the unnecessary custodian fees, Vecchio noted that bitcoin is in what’s called contango, which occurs when the futures price of a commodity is higher than its spot price.
“Because there is expected future price appreciation in bitcoin for the next several months, the November, December contracts are trading at a higher level than the current spot price,” Vecchio said.
He noted that BITO’s current structure has ProShares sell the lower-priced front-month contracts that are near expiration to buy the higher-priced, longer-term ones. This continuous process known as rolling means they end up paying more per unit, per contract than they would have by simply operating in the spot market.
As the ETFs roll over each month, they create a negative roll yield, causing returns to be relatively lower than the returns that could have been yielded from exposure to bitcoin’s spot price. Vecchio noted that the ETF trailed bitcoin’s performance in its first few days of trading: early on Friday, it was down 3.8% while spot bitcoin was down only 1.8%.
The BITO ETF is also structured such that CME Group only allows a maximum of 2,000 contracts in the front-month futures while limiting overall positions across different maturities at 5,000 total contracts.
“At the end of the day yesterday [Thursday], the ETF held roughly 1,679 contracts due to expire on October 29th, which means that it’s reaching the cap for the front-month contract. And what this does is necessitate the ETF to buy futures contracts that are longer-dated,” Vecchio said.
BITO went to market on October 19, opening at a price of $41.94. As of Friday, it was trading at around $39.42, down almost 6%.
Simeon Hyman, the global investment strategist at ProShares, recently told Insider the ETF is a “powerful way” to get exposure to bitcoin. His reasons included the fact that CME futures are regulated, and so they protect investors from market manipulation.
Traditionally, the idea of turning to futures prevents a trader from needing to receive the physical delivery of the commodity being bought and sold, such as barrels of oil. Bitcoin doesn’t have that issue because it’s a digital asset, Vecchio noted. So while it makes sense in the former scenario, it doesn’t here.
But that doesn’t mean it’ll always be a bad idea. During the crypto bear market, it may flip to a positive roll yield. If futures prices are listed lower than current spot prices, then we’d be in what’s called backwardation, the opposite of contango. The fund would be selling higher-priced front-month contracts, and then buying lower price futures contracts.
“I would certainly be interested in an ETF where it’s using the actual physical bitcoin itself rather than the futures,” Vecchio said.
No such product has been approved yet by the Securities and Exchange Commission. WisdomTree, SkyBridge, and VanEck are among the high-profile firms that are awaiting the regulator’s coveted green light.